Corporate Law Update
- More materials are now available on the UK’s new national security screening regime
- The FRC publishes a factsheet on climate-related matters in annual reports
- The FCA publishes guidance on the requirement for listed companies to disclose against the TCFD’s recommendations
- The BVCA publishes a report on actions portfolio companies are taking towards Net Zero
- The Takeover Panel publishes a bulletin on irrevocable commitments and letters of intent
- The FCA and the FRC publish a joint letter to issuer CEOs on the new ESEF reporting requirements
- Glass Lewis publishes its proxy voting guidelines for the 2022 AGM season
- The European Commission is seeking views on the quality of EU corporate reporting
This week we have seen a slew of materials published on the National Security and Investment Act 2021, which contains the UK’s new national security screening regime.
The regime is scheduled to come into effect from 4 January 2022 but will apply to acquisitions and investments made since 12 November 2020.
As a reminder, the new regime will give the UK Government the ability to intervene in acquisitions of entities or assets above a minimum threshold of control if it believes there is a risk to the UK’s national security. If it is satisfied that an acquisition creates a national security risk, the Government will be able to impose conditions on it, or even block it or unwind it completely.
The regime applies to acquisitions of entities or assets whether or not they are based in the UK or abroad, although acquisitions of non-UK entities and assets are within scope only if they are used to carry on activities in the UK or supply goods or services to people within the UK.
The Government published guidance on the regime in July this year. It has now updated that guidance to provide more detail on how the process of reviewing and assessing an acquisition will work, how the regime will be enforced and how to contact the Government’s new Investment Security Unit (ISU), which will administer the regime.
Mandatory notification and the “sensitive sectors”
Where someone is proposing to acquire control over an entity in a “specified sector” (known as a “notifiable acquisition”), they must inform the UK Government in advance and seek approval before completing the acquisition. Completing a notifiable acquisition without Government approval is a criminal offence and may render the acquisition void as a matter of UK law.
There are 17 specified sectors, which represent those areas of the UK economy that are most directly relevant to the UK’s national security. They are: advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to Government, cryptographic authentication, data infrastructure, defence, energy, military and dual-use, quantum technologies, satellite and space technologies, suppliers to the emergency services, synthetic biology and transport.
The final regulations setting out the descriptions of the sectors have now been published. The regulations contain 17 schedules that define the sectors in considerable detail. In places, the descriptions are highly technical or refer to other legal frameworks.
To assist with understanding the sectors, the Government has published new guidance on notifiable acquisitions. This supplements the regulations and provides helpful narrative descriptions of some sectors. It also contains useful examples to help decide whether activities fall within the more complex sectors. It is not, however, a substitute for checking the detailed descriptions in the legislation. Anyone proposing to acquire an entity that might be conducting business in any of these sectors should review both the regulations and the guidance carefully and seek professional advice.
Compliance with the regime will be enforced through a combination of civil fines and criminal sanctions. For legal entities, the level of fine will be capped at £10 million or 5% of worldwide turnover, whichever is higher. Regulations have now been published setting out how an entity’s turnover will be calculated for these purposes.
Regulations have also been published setting out what information a person making a mandatory or voluntary notification to the ISU will need to include in their notice. This includes the nature of control being acquired, the ownership structure of the entity or asset being acquired, and the ownership structure of the acquirer (if the acquirer is an entity).
Finally, regulations have been published setting out how the Government will communicate with individuals and entities in connection with the regime.
What should I do now?
If you are planning an acquisition, you will need to check whether it is within the scope of the new screening regime and seek professional advice.
If you are proposing to acquire an entity within one of the 17 specified sectors and complete your acquisition on or after 4 January 2022, you will almost certainly need to notify the Government and obtain formal approval before doing so.
If you are planning to complete your acquisition before 4 January 2022, or you are proposing to acquire an entity outside the specified sectors or an asset (whether or not within a specified sector), you will not be required to notify the Government and obtain approval. However, the Government may still be able to review your acquisition. You should therefore seek professional advice on the merits of notifying the Government and seeking clearance on a voluntary basis.
If you have completed an acquisition since 12 November 2020, the Government may be able to review your acquisition retrospectively. The Government has said that it intends to use its retrospective power sparingly. However, if you are concerned, you may be able to make a validation application to seek retrospective clearance from the Government. Again, you should speak to your professional advisers to decide whether this is an appropriate and proportionate course of action.
The Financial Reporting Council (FRC) has published a new factsheet on climate-related matters for organisations that prepare their annual reports using Financial Reporting Standard (FRS) 201.
The factsheet is designed to inform preparers of climate-related matters they may need to consider when preparing financial statements and associated narrative reporting. It outlines ways in which climate-related reporting may impact a set of financial statements, including how climate-related matters could impact the recognition and measurement of items in the financial statements and dictate what disclosures are required.
The factsheet contains numerous examples of climate-related matters that may affect financial reporting, set against the different sections of FRS 102 and split out into recognition, measurement, impairment, disclosure and (where relevant) useful life and residual value. It then provides a useful summary of the non-financial reporting framework relevant to climate-related matters.
The Financial Conduct Authority (FCA) has published Primary Market Bulletin 36 (PMB 36), setting out its approach to reporting against the recommendations in the Final Report of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations) and consulting on a new technical note.
By way of background, premium-listed companies are required, for financial years beginning on or after 1 January 2021, to provide disclosures in accordance with the TCFD Recommendations on a “comply or explain” basis. The first disclosures will therefore appear from January 2022.
The FCA has previously consulted on extending this reporting requirement to standard-listed companies. We currently await the outcome of that consultation.
The key points arising out of PMB 36 are set out below.
- Standard-listed companies. The FCA has confirmed that it intends to finalise rules for TCFD reporting by standard-listed companies so that they apply to financial years beginning on or after 1 January 2022 (with first reporting therefore beginning in January 2023).
- Deep-dive reviews. The FCA intends to work with the Financial Reporting Council (FRC) (which is responsible for reviewing the new TCFD disclosures) on “targeted deep-dive thematic work” designed to assess how companies have complied with the new requirements, identify areas of concern and disseminate examples of best practice.
- Enforcement. The FCA expects most instances of non-compliance to be dealt with through initial engagement between a listed company and the FRC. However, if discussions with the FRC do not produce a satisfactory outcome, the FCA will step in to take appropriate action.
- Failure to publish a statement. If a listed company fails to publish a TCFD statement, the FCA will ask it to publish one through a Regulatory Information Service (RIS) as soon as possible. The FCA will treat non-compliance seriously and will take action, including sanctions, if appropriate.
- Overlap with new climate-reporting regime. The FCA has acknowledged that the introduction by the Government of a new climate-reporting requirement for larger companies (see our previous Corporate Law Update) will create overlap. It will continue to evolve its supervisory strategy in the coming years and will provide more information in future Primary Market Bulletins as appropriate.
The FCA is also consulting on a new Primary Market Technical Note to provide further guidance on the new TCFD reporting requirement. Among other things, the FCA is proposing to give the following guidance in the new technical note.
- When giving reasons for not including TCFD disclosures in its annual report, a listed company should provide a full, clear and meaningful explanation, written in plain language that is easy to understand and leaves no room for ambiguity.
- If a listed company provides details of steps it is taking (or plans to take) to make disclosures in the future, it should provide enough detail to allow investors to fully understand the nature of the proposed action.
- If a company states that it has made disclosures consistent with the TCFD Recommendations, those disclosures should (in line with the TCFD’s Fundamental Principles for Effective Disclosure) include sufficient, company-specific information to support investors’ decision-making.
- While a companies can seek views from third parties (including external auditors and other advisers) when formulating disclosures, it is ultimately for the company itself (using its knowledge of its actual and expected activities, operating environment and exposure to physical and transition risks) to ensure compliance.
- BVCA publishes report on Net Zero action in private capital. The British Private Equity and Venture Capital Association has published a short report titled “10 Steps to Net Zero”, setting out steps certain private equity or venture capital-backed companies have taken to move towards Net Zero. The report may be of interest for any portfolio companies that are investigating ways in which to progress their own Net Zero action plan.
- Takeover Panel publishes bulletin on irrevocable commitments. The Takeover Panel has published Panel Bulletin 3. The Bulletin reminds readers that, under Rule 2.10(c) of the Takeover Code, a person who has given an irrevocable commitment or a letter of intent must make an announcement if they become aware that they can no longer comply with the commitment or letter. The Panel Executive states that it has become aware of a number of recent cases where a shareholder that had given a letter of intent to accept an offer later sold shares and did not make a prompt announcement.
- FCA and FRC published letter to CEOs on ESEF reporting. The Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA) have published a joint letter to the CEOs of issuers whose securities are admitted to trading on a UK regulated markets. The letter reminds issuers that, for financial years beginning on or after 1 January 2021, they must file their accounts in XHTML format using the new European Single Electronic Format. The letter also notes that the quality of voluntary XHTML reporting so far is not of the expected standard. It notes that issuers should pay the same care and attention to XHTML reporting as they do to reporting in PDF or printed form and refers issuers to the recent report published by the FRC’s Lab on structured electronic reporting.
- Glass Lewis publishes 2022 voting guidelines. Shareholder proxy advisor Glass Lewis has published its 2022 UK Policy Guidelines, which set out the basis on which it will advise shareholders on how to vote on resolutions proposed by a FTSE listed company during the 2022 AGM season. Areas of enhanced focus in 2022 include ethnic and gender diversity on the board, environmental and social risk oversight, environmental and social metrics in variable incentive programmes, and the grant of incentives to directors who are also shareholders.
- European Commission consults on quality of corporate reporting. The European Commission is consulting on the quality of reporting under EU law by public interest companies and companies listed within the European Union. The consultation may be of interest to UK companies whose securities are admitted to trading on an EU market. The Commission has asked for responses by 4 February 2022.